KPMG Fires Partner, Resigns As Herbalife Auditor

Rogue partner at KPMG forces firm to resign as auditor for Herbalife, Skechers

KPMG initially announced late Monday that it had fired a partner who had leaked private information about clients. It said then that it was resigning as auditor for two of its clients, but didn't identify them.

Herbalife and Skechers made their own announcements on Tuesday confirming that they were they companies involved.

KPMG sought to distance itself from the partner. In its statement, the firm said: "This individual violated the firm's rigorous policies and protections, betrayed the trust of clients as well as colleagues, and acted with deliberate disregard for KPMG's longstanding culture of professionalism and integrity."

Investors knew something was wrong when Herbalife shares failed to open along with the rest of the stock market Tuesday morning. Skechers did open as normal, but it was halted later in the morning.

The development comes at an especially awkward time for Herbalife. Activist investor Bill Ackman has publicly attacked Herbalife, saying it distorts the financial information it gives to investors. His rival Carl Icahn has vehemently disagreed and has increased his stake in the company. In February, the dogfight boiled over into the public arena as Ackman and Icahn got in a shouting match on live television.

Herbalife has gone on the defensive against Ackman, disputing his characterization of the company and saying that Ackman wants to push the stock down for his own benefit.

Timothy Ramey, an analyst at D.A. Davidson & Co., downgraded Herbalife to neutral from buy. He noted that Tuesday's development was not Herbalife's fault, and said the fundamentals of the business were unchanged. Still, he said, the KPMG development could cause "heightened risk and volatility near-term."

"We assume the process of hiring a new auditor will go quickly - maybe days or weeks," Ramey wrote. "However, the new auditor will have to perform its own audit and re-establish its own review of financial controls. We estimate this process could take as long as a year - we guess HLF would be lucky to file their 2013 10-K on time."